SEC Sues Fannie and Freddie Executives... Finally



Tags: subprime, fannie, credit, against, mortgage, freddie, exposure, investors, companies, business

Like Ricky Martin's 2010 truth of the year, the SEC has finally come around to doing what everyone knew they had to do, and filled suit against the former heads of Fannie Mae and Freddie Mac for lying to investors and leading the mortgage community into thinking they were stable institutions. It was as obvious as Livin' La Vida Loca.

Anyone who looked closely act GSE activities at the time would have known they were lying. But millions trusted them, and as a result hundreds of millions more have been impacted by the GSEs contributing to the build up of toxic debt in the financial system and household balance sheets, which in turn exacerbated the financial crisis, which spilled over into Main Street and still haunts the economy to today. Perhaps, with the law suits against Fannie and Freddie justice will finally be served.

Don't quite hold your breath though. While Judge Dred has recently pushed back hard against the SEC ands its infamous "non admittance of guilt" settlements, these cases could still be swept under the rug. Consider that, in an ironic twist of fate, the SEC has just agreed on a settlement agreement with Fannie and Freddie themselves, as companies. The civil charges against the GSEs are not being disputed by the companies and the GSEs are "accepting responsibility" but "without admitting or denying wrongdoing." The GSEs don't have to pay a fine, but instead are planning to cooperate in the SEC litigation against the former GSE executives.

Let your mind wrap around that for a second before blood starts to trickle down from your ears. The GSEs are saying: "Okay, we won't deny that we did a lot of bad stuff, misled investors, leveraged our tacit government backstop to make huge bets that paid off in compensation in the near term but destroyed our companies, our creditors, and American homeowners in the process. But if you don't make us admit to any of that, or pay any restitution, we'll help you sue the guys who used to run the joints—which we would do for legal reasons anyway." Thank you American justice system.

Theoretically this could be a sign that the SEC doesn't want to wrestle with the companies right now, in conservatorship, and they'd prefer to get the guys who helped perpetrate the mess. But giving the SEC the benefit of the doubt is not something they've earned recently.

Anyway, here is the background on the two suits filed by the SEC. There is one each against the companies: 

 

  • The suit against Fannie targets Daniel H. Mudd (CEO from 2005-2008), Enrico Dallavecchia (Chief Risk Officer from 2006 to 2008), and Thomas A. Lund (EVP from 2005 to 2009). Why Lund was allowed to stay as an EVP until June of 2009 just blows my mind—until I force myself to stop thinking rationally. 
  • The law suit against Freddie targets Richard F. Syron (CEO from 2003 to 2008), Patricia  L.  Cook  (Chief Business Officer 2004 to 2008),  and  Donald· J.  Bisenius (SVP for Credit Policy and Portfolio Management starting in 2003, and according to BusinessWeek he still works for Freddie Mac).
  • Since the lawsuit is focused just on lies told between December 2006 and August 2008, guys like Jim Johnson—godfather of Fannie Mae's transformation from market distorter to mafia machine in Washington—and Franklin Raines are being let off the hook. 

 

The suits specifically accuse the six executives making false and misleading statements about GSE exposure, and specifically used accounting and definition tricks related to subprime mortgages. Ed Pinto, over at AEI, has done a lot of work to point out how accurately defining categories for mortgages in the GSE realm is important for understanding their role in the crisis—i.e., if you defined subprime loans really narrowly, then you could argue the GSEs were not involved in the subprime mess that banks got caught up in and so the GSEs really didn't play a big part in the financial crisis. This is also known as politics in Washington. (Click here and here for some of Ed's detailed analysis.)

Here are some of the SEC's accusations against Fannie Mae:

...in a February 2007 public filing, Fannie Mae described subprime loans as loans "made to borrowers with weaker credit histories" and reported that 0.2%, or approximately $4.8 billion, of its Single Family credit book of business as of December 31, 2006, consisted of subprime mortgage loans or structured Fannie Mae Mortgage Backed Securities ("MBS") backed by subprime mortgage loans.

Fannie Mae did not disclose to investors that in calculating the Company's reported exposure to subprime loans, Fannie Mae did not include loan products specifically targeted by the Company towards borrowers with weaker credit histories, including Expanded Approval ("EA") loans. As of December 31, 2006, the amount ofEA loans owned or securitized in the Company's single-family credit business was approximately $43.3 billion, yet none of these loans were included in the Company's disclosed subprime exposure.

Fannie Mae's exclusion of loans such as EA from its subprime disclosures was particularly misleading because EA loans were exactly the type of loans that investors would reasonably believe Fannie Mae included when calculating its exposure to subprime loans. In fact, the Company identified EA as its "most significant initiative to serve credit impaired borrowers" in response to regulatory requests for information on its subprime loans. In addition, all of the Defendants knew that EA loans had higher average serious delinquency rates, higher credit losses, and lower average credit scores than the loans Fannie Mae included when calculating its disclosed subprime loan exposure.

In a November 2007 public filing, Fannie Mae described subprime loans as a loan to a borrower with a "weaker credit profile than that of a prime borrower," classified mortgage loans as "subprime" if the mortgage loans were originated by a "specialty" subprime lender or a "subprime division of a large lender," and again represented that only 0.2%, or approximately $4.8 billion, of its Single Family credit book of business consisted of subprime mortgage loans or structured Fannie Mae MBS backed by subprime mortgage loans as of both March 31, 2007, and June 30, 2007.

Fannie Mae did not tell investors that in calculating the Company's exposure to subprime loans reported in this filing, Fannie Mae again did not include at least $43 billion of EA loans, included loans from only fifteen loan originators of the approximately 210 lenders listed on the HUD Subprime Lender list, and did not even have the capacity to track whether loans were originated by a subprime division of a large lender.

(HT: Zerohedge)

Read the Journal's coverage of the story here.

See Reason's Fannie & Freddie coverage here.

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Irina said... Rating: 0   Vote +   Vote -  

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Fan motor may not rotate and overheat, which can cause smoke or flames from fan and/or shroud, fan electrical wiring, or fan motor, resulting in vehicle fire. 1995 Ford WindstarNumber of Vehicles: 112,000Completion rate: to be providedAlternator output wire was not connected tightly to power distribution box. This can result in overheating of the connection and vehicle fire. 1997 Ford F-Super DutyA plastic coated steel strap was crimped to battery cable for support. Battery cable insulation could have been damaged when the strap was crimped onto the cable. This damage can result in the battery cable developing a short to ground. 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Fuel could be transferred from one tank to the other, possibly resulting in fuel overflow and spillage; in presence of an ignition source, a fire could occur. 1991 Ford Lincoln Town CarNumber of Vehicles: 26,000Distorted fuel lines in engine compartment may contact the steering column universal joint and cause damage to the fuel line, resulting in fuel leakage and possibly a fire. 1993 Ford Mercury VillagerNumber of Vehicles: 10,800Fuel filler hoses may have been cut prior to installation by a utility knife used to open the shipping box. Fuel leakage can result if the cut extended through the thickness of the hose wall. Leaking fuel can result in an underhood fire. 1993 Ford Mercury Villager Number of Vehicles: 10,800 Fuel filler hoses may have been cut prior to installation by a utility knife used to open the shipping box. Fuel leakage can result if the cut extended through the thickness of the hose wall. 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A fuel leak may result in a fire, if a source of ignition is present. 1994 Ford RangerNumber of Vehicles: 11,400Front fuel lines on pickups with 3.0 and 4.0-liter engines have a section of flexible hose that is susceptible to cracking. This can allow fuel leakage and result in fire when exposed to a source of ignition. 1994 Ford AspireNumber of Vehicles: 26,700Fuel supply, return and vapor hoses or lines can contact or have inadequate clearance with surrounding components because of improper positioning during assembly. Wear of hose or line can occur, resulting in fuel leakage in the engine compartment and fire. 1997 Ford Mercury VillagerFour rubber fuel line connector hoses that are supplied to Ford with fuel tank assembly were improperly manufactured. These hoses can develop cracks or splits resulting in fuel leakage and a possible fire. 1992-93 Ford Thunderbird Mercury CougarNumber of Vehicles: 125,000Movement of fuel lines causes nylon fuel line jumper to chafe against floor pan. Wear can cause pin hole in one of the fuel lines, resulting in fuel leakage and possible fire. 1998 Ford RangerNumber of Vehicles: 2,000Flexible section of chassis mounted fuel line connecting engine was routed too close to exhaust manifold and line could contact manifold. This could result in damage to fuel line, cause fuel leak, and result in fire. 1996 Ford Ford AerostarNumber of Vehicles: 91,000On truck-vans, insufficient interference fit between fuel tank filler pipe and grommet could result in an inadequate seal which could allow fuel to seep from the joint. In the presence of an ignition source, fuel leakage could result in a fire. 1991 Ford Truck ExplorerNumber of Vehicles: 25,000Front heat shield may contact front of the plastic fuel tank, causing cuts or other damage to the extent of the penetration. This could cause vapors to escape and possibly fuel to spill, which could lead to a fire. 1991 Ford Truck ExplorerNumber of Vehicles: 18,000The hot plate weld which attaches vapor vent valve carrier to top of the plastic fuel tank may partially fracture, allowing fuel vapor to escape from the top of the tank. The escaped vapor or leaked fuel could cause a fire in the presence of an ignition source. 1989, 1990, 1991 Ford Econoline; 1989 F-150, F-250, F-350Number of Vehicles: 350,000Dual function fuel reservoir may malfunction and cause an overfill condition in one of the fuel tanks, resulting in an overflow of fuel past filler cap. Overflow of fuel past filler cap causes a fuel leakage, which can result in fire when exposed to a source of ignition. 1991 Ford Escort; 1991 Mercury TracerNumber of Vehicles: 22,000Fatigue cracks can develop in the solder joint between the fuel return tube and the fuel pump sending unit located at the top of the fuel tank. Should a crack develop, fuel vapor can escape from the tank when the tank is full and a small amount of fuel can leak from the crack and result in fire. 1991-93 Ford Truck F Super Duty, 1990-93 F-150, F-250, F-350Number of Vehicles: 1,131,000Light trucks and chassis cabs with gasoline engines and dual fuel tanks. A malfunctioning check valve within the fuel pump assembly causes a portion of the unused fuel from one tank to be returned to the second tank. When this occurs, the capacity of the second tank can be exceeded, causing fuel spillage which can result in a fire. 1991-94 Ford L800, L900, L9000 Number of Vehicles: 3,200 On heavy duty trucks with Detroit Diesel Series 60 engines, labels reminding service personnel closing fuel tank crossover valves to reopen valves before operating engines were omitted. 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If vehicle is in collision and natural gas fuel line is damaged, system could leak natural gas and result in fire. 1998 Ford MustangNumber of Vehicles: 8,000Vehicles have missing or inadequately brazed joints between fuel rail body and fuel rail mounting brackets. If bracket separates from rail, rail can lift one or more of injectors, and fuel leakage will result and fire can occur. 1988-89 Ford Taurus, Mercury SableNumber of Vehicles: 278,000Power seat switch wiring is routed over rather than under the front seat support brace, allowing damage by seat cushion spring ends when seat is occupied. The wiring insulation may become abraded, or punctured; an electrical short can occur, possibly resulting in a fire in the seat cushion material. 1992-93 Ford Crown VictoriaNumber of Vehicles: 16,000Power front seat tracks. Police and fleet vehicles equipped with rubber floor mats and non-powered front seats. An unused power seat harness connector is positioned on the rubber floor mat under the seat. If the vehicle is operated in cold weather areas that have large amounts of salt used for snow and ice control, a puddle of saltwater can accumulate on the rubber floor mats, repeatedly wetting the connector. This will result in corrosion of the connector, causing current to flow between the terminals without tripping the circuit breaker. If this occurs, electrical current can heat the connector and release fumes into the passenger compartment. This can result in a vehicle fire. 1997 Ford Taurus Windstar, Mercury SableNumber of Vehicles: 100,000Low/intermediate servo cover can separate from transaxle while vehicle is being driven. If this occurs, transmission fluid will leak and contact catalytic converter. 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Powertrain bending resonance or output shaft bushing displacement can result in structural failure of transmission and/or transfer case. Fluid expulsion, drive shaft separation, or loss of vehicle drive can result, particularly as result of sustained driving at high speed and high ambient temperatures. This can cause loss of vehicle control, and vehicle fire. 1993 Ford Mercury VillagerNumber of vehicles: 48,053Leaves and other foreign material can enter through the cowl panel air intake during operation of the front heater and/or air conditioning system resulting in a build-up of material in the plenum. This can lead to noise, odors, or ignition of these materials, causing a fire.

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